I've always used sandpaper wrapped around a 6-8" paint stick. contours pretty well. I prefer wet sanding because of the dust & I can use the water to help keep the paper from clogging as fast. But in terms of finished product I don't see a reason why you couldn't use dry aswell.

I generally stick to 400 & lower (only lower if i'm going to bare metal & primering, if i'm going over existing paint i stay at 400). I've tried using 800 before, but the paint wasn't as durable. As of now the highest I would go would be 600, but i prefer 400.
After the painting is completely done I'll go over the car with 1500, then buff to get the surface as flat as possible so it doesn't have light orange peel like most painted & factory cars I see.